USD underpinned by tightening monetary policy

Despite September’s non-farm payroll headline being softer than expected at 134,000 compared to 270,000 the previous month, other readings of the U.S. labour market remain firm. Some of the payroll weakness can be attributed to Hurricane Florence, while the balance is more than offset by an upwards revision of 87,000 jobs for the previous two months. In addition, the unemployment rate fell from 3.9% in August to 3.7% and hourly wages were firm at 2.8% y/y. Therefore there is nothing in this report to alter expectations of rate hike in December, with a 76% probability now being attached to this by markets.

Evidence supporting this opinion could be seen in Atlanta Fed (and FOMC voter) President Raphael Bostic’s comments last week that the strength of the US economy raises a question of overheating and as a result, “a higher path of rates” may be required. This was also re-affirmed by Dallas Fed President Kaplan stating he would be comfortable with an additional rate hike in December 2018 and two more hikes in 2019, while highlighting the dangers of moving too slowly. With data continuing to be constructive and show resilient growth in the U.S. economy, interest rates seem destined to continue rising, underpinning the dollar in the process.